Death of Deflation Trade Takes Hold as U.S. Bonds Breach Ceiling

The bond market may be seeing the death knell of a popular bet that inflation will stay low.

The 30-year Treasury bond’s yield rose above a key level that this week, breaking out of what’s know as its 200-day moving average. That may signal traders are done betting the collapse of oil prices will lead to deflation after pushing the longest-maturity debt to record lows in January.

“People aren’t concerned about deflation anymore,” said Justin Lederer, interest-rate strategist at Cantor Fitzgerald LP in New York. “That trade is, at least for now, in the background.”

Bond yields rose Monday above the 200-day moving average of 2.849 percent, a crucial level for chart-watchers who look at technical indicators as a guide to future price moves. After breaking the level, the yield could rise as high as 3 percent, according to Tyler Tucci, a strategist with RBS Securities in Stamford, Connecticut. Bonds yielded 2.91 percent at 12:48 p.m. New York time.

Longer-term Treasuries had outperformed shorter-term debt this year as Europe fought deflation and investors focused on the possibility that job strength could prompt the Federal Reserve to raise interest rates. Oil prices have since rebounded and the bond market’s inflation forecasts have recovered, just as weak economic growth pushes out traders’ timelines for a Fed rate increase.

“The dollar is weakening and oil is picking up. Wages are going up,” said Marc Pfeffer, a Westchester, New York-based senior portfolio manager for CLS Investments, which manages $6.5 billion. “You could have some inflation in the U.S. sticking.”

Because of that, Pfeffer said he recently bought Treasury Inflation-Protected Securities, which shield holders against rising consumer prices, through the $14 billion iShares TIPS Bond exchange-traded fund. He expects wage growth to speed up further from here.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE